In a scenario that challenges traditional assumptions, high-income households are increasingly finding themselves living paycheck to paycheck. A recent analysis by Bank of America reveals that approximately 20% of U.S. households with incomes exceeding $150,000 annually are struggling to manage their expenses within their earnings. This analysis, derived from an examination of anonymized banking and spending data from U.S. customers, categorizes those living paycheck to paycheck as individuals who allocate more than 95% of their household income to essentials. These essentials include gasoline, food, utilities, internet, public transportation, childcare, and housing costs.
Interestingly, the research finds that while lower-income families, particularly those earning less than $50,000 a year, have the highest percentage (about 35%) living paycheck to paycheck, the phenomenon does not diminish as drastically as one would expect at higher income levels. Families earning between $50,000 and $75,000 also show a notable percentage struggling to break free from this financial cycle, with their proportion closely following that of those households earning more than $150,000.
The reasons behind this trend are multifaceted. Higher-income families often undertake larger financial commitments, such as purchasing expensive homes which lead to substantial mortgages. These larger homes come with increased property taxes, insurance, and utility bills. According to David Tinsley, a senior economist at the Bank of America Institute, there's often an assumption among higher earners that future promotions and raises will offset these larger expenses. Additionally, families with young children face higher childcare costs, although these may decrease once children begin school.
It is also crucial to consider that the study didn't differentiate between various levels of necessity spending. Higher costs associated with elite education or upscale childcare are still classified as necessities without distinguishing their nature. This aspect highlights the varied pressures faced by higher-income families when meeting their perceived necessary expenditures. Despite these challenges, the continued impact of inflation remains a significant factor weighing heavily on households across all income levels. Although inflation has slowed, Americans are still experiencing a roughly 20% increase in the cost of living since February 2020, just before the pandemic hit.
Simultaneously, wage growth has been tepid, failing to keep pace with the rising costs. As the labor market cools, the average hourly wages only increased by 4% in September compared to the previous year, marking a slowdown from more robust wage growth seen two years prior. Such economic dynamics underscore the evolving financial landscape for many American families who, despite higher incomes, are trapped in a cycle of necessity-driven spending.
